The Israeli government is guilty of systematic fraud, "institutional lawbreaking" and the theft of private Palestinian land to covertly establish illegal Jewish outposts in the West Bank, according an official report released yesterday.

The report reveals a widespread conspiracy involving government ministries, local authorities and the military to assist Jewish settlers to build the outposts in violation of Israeli law and the government's publicly stated policy.

Although the investigation does not name the Israeli prime minister, Ariel Sharon, about half of the 100 or so outposts in the occupied territories were built since he came to power four years ago.

The report, written by a former chief state prosecutor Talia Sasson, recommends that those responsible be prosecuted. Any investigation could be expected to involve a number of politicians including Mr Sharon.

"No one seriously intended to enforce the law," said the report. "It seems as if the violation of the law has become institutional and institutionalised. There is blatant violation of the law by certain national authorities, public authorities, regional councils ... and the settlers."

Ms Sasson said that the authorities need to take "drastic steps" to protect democracy.

The report names the housing and education ministries, the Israeli military administration in the occupied territories and the World Zionist Organisation as among the arms of government responsible for "systematically establishing illegal settlement points".

Between them they diverted tens of millions of pounds to the project although Ms Sasson said she was unable to establish the exact figure because some ministries obstructed her investigation. "[The housing ministry] prepared areas, paved roads, connected [outposts] to water and electricity and built public buildings for unauthorised settlement outposts. The assistance was carried out in the guise of building new neighbourhoods for existing settlements, all to circumvent the difficulty of the lack of a government resolution to establish outposts," said the report.

Some of the outposts were built on private Palestinian land but the Israeli army protected the settlers who were squatting there from claims by the Arab owners.

The report says the government made it appear as if it were being guided by the law when it was instead subverting it: "Everything is done for appearances' sake, as if a regulated institutional establishment were acting within the confines of the law."

Under Israeli law the outposts are illegal because they were not formally authorised by the government.

Mr Sharon commissioned the report nine months ago under US pressure after he failed to fulfil a personal commitment to President George Bush to dismantle the outposts.

Dror Etkes, head of Peace Now's settlement watch, said: "We're talking about a mafia that is being hired and paid by the government to break the law. The Sasson report confirms what we have always known to be true."

The report says that the outposts were often established by subterfuge. One tactic was to build a mobile phone mast, sometimes a fake, on Palestinian land. Next came a guard post to protect the mast followed by a paved road and then mobile homes for the guards to live in. Shortly afterwards settlers moved in.

In 2003 alone, the government spent about £5m on providing mobile homes to the outposts.